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Game Theory and International Environmental Cooperation

Michael Finus

The book investigates various strategies to provide countries with an incentive to accede, agree and comply to an international environmental agreement (IEA). Finus shows that by integrating real world restrictions into a model, game theory is a powerful tool for explaining the divergence between ‘first-best’ policy recommendations and ‘second-best’ designs of actual IEAs. For instance he explains why (inefficient) uniform emission reduction quotas have played such a prominent role in past IEAs despite economists’ recommendations for the use of (efficient) market-based instruments as for example emission targets and permits. Moreover, it is stated, that a single, global IEA on climate is not necessarily the best strategy and small coalitions may enjoy a higher stability and may achieve more.
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Chapter 5: Infinite Dynamic Games with Discrete Strategy Space: A First Approach

Michael Finus


5. Infinite dynamic games with discrete strategy space: a first approach INTRODUCTION 5.1 In Chapter 4 it was demonstrated that in finitely repeated simultaneous (sequential) move games with a single stage game Nash equilibrium (NE) (subgame-perfect equilibrium (SPE)), only this equilibrium will be played throughout the game. In negative externality games, like the PD game, this implies that cooperation cannot be established. In this section, we start again by considering a PD game and generalize the results subsequently. As pointed out in Section 4.3, we shall assume from now onwards simultaneous moves for simplicity, though in most cases an extension to cover the case of sequential moves is straightforward. In contrast to a finite setting, we cannot use backwards induction to solve the game. Though this may seem a disadvantage from an analytical point of view, it is this very fact which is responsible for obtaining more ‘optimistic’ results in an infinite time horizon. Since the end of the game is not known with certainty, a player must always reckon with a costly and long-lasting punishment if s/he takes a free-ride. This might enforce compliance (Holler and Illing 1996, p. 22; Rasmusen 1995, p. 123; Taylor 1987). Generally, there are two interpretations of infinite games: either, as the name suggests, the games last until perpetuity, or the end of the game is not known with certainty. The latter interpretation implies that there is a probability – though this might be very small – that the game continues (Gibbons 1992,...

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